A2milk tells China: We’re as Kiwi as
Alternative dairy company emphasises its Kiwi connection, as rising diplomatic hostility hits Australian exports to China
As relations between Australia and China grow ever more hostile, a2 Milk is emphasising its Kiwi connection. The dual-listed alternative dairy company is based in Australia but gets its high-margin infant formula from New Zealand’s Synlait. Most of its staff are in Australia and the company has an 11 per cent share of that country’s fresh milk market.
Individual Kiwis feature strongly on the company’s share register, while Aussie institutions and fund managers dominate across the Tasman.
Some fund managers have suggested that a2 Milk’s sales in China might get caught up in the growing hostility between the People’s Republic and Australia, which has resulted in reports of many Australian exports — from barley to wine — facing restrictions in the giant market.
The relationship began to deteriorate in 2018, amid growing concerns about Chinese political influence in various areas of Australian society. The Covid-19 pandemic has created further tensions.
Matters took a turn for the worse this week when China rejected the latest attack on its Hong Kong policy from the US and allies such as New Zealand, saying they “should face up to the reality” that the former British colony has been returned to China.
Foreign Ministry spokesman Zhao Lijian was responding to a statement on Hong Kong issued by the US, UK, Australia, Canada and New Zealand, which together make up the intelligence partnership known as the Five Eyes.
Nearly all of a2 Milk’s China-bound product is made in New Zealand and in terms of its relations with the People’s Republic, the company is as Kiwi as it gets, says chairman David Hearn.
“As far as I’m concerned, in China we are positioning ourselves as a New Zealand company,” Hearn told the Herald this week after a2 Milk’s annual meeting.
“It does not take away from the fact that the Australian Government has chosen to take a rather more publicly antagonistic position with China, which makes doing business for everybody — not just us — more challenging,” said the Uk-based Hearn.
“From the outside, I don’t think it suits Australia very well, because as a country it is very dependent on China as both an exporter and an importer.
“I can’t see that taking on China in public is a fight that you are likely to win.
“We are busy positioning ourselves, as we truthfully are, as a New Zealand business.
“Countries always fall out,” Hearn said. “The thing that is challenging about the Australian attitude to this problem is that they are conducting all their issues with China in open country.
“That’s not something the Chinese find easy to deal with.
“It’s perfectly reasonable that, from time to time, there will be disagreements between countries, but you need to manage them in such a way that there is a chance of creating a positive outcome.
“I think New Zealand is a lot more careful and subtle about how they exhibit their concerns, so they don’t get the blowback.”
A2 Milk, which has a close relationship with Synlait Milk — its sole supplier of infant formula — recently took part in Synlait’s capital raising, in order to maintain its nearly 20 per cent stake in the company.
Synlait’s other main shareholder, China’s Bright Dairy Holdings, also took part, thereby maintaining its 39 per cent stake.
Both a2 Milk and Synlait are making moves to become less reliant on each other. Synlait is taking on other big customers and diversifying, while a2 Milk is taking a 75 per cent holding in Mataura Valley Milk, so it can make formula in its own right.
Mataura Valley is majority owned by
China Animal Husbandry Group, the sister company of a2 Milk’s distribution partner on the mainland — China State Farm.
Hearn said a2 Milk’s reinvestment in Synlait and its purchase of Mataura Valley were all about deepening its roots in New Zealand.
“In many ways I’m quite glad that Synlait undertook a capital raising because it allowed us to put our money where our mouth is,” said Hearn.
He said he expects the Mataura Valley deal to go through before the end of the year and for a2 Milk to take control of the plant next year.
A2 Milk’s earnings outlook has been clouded by the “daigou” trade out of Australia, particularly in the state of Victoria, which has been hit hard by Covid-19 lockdowns.
Daigou, which means “buying on behalf of”, covers the unofficial group of individuals who shop and send products to China for a profit.
“We are clearly facing a significant short-term challenge — nobody would deny that,” said Hearn.
But once the effects of the pandemic blow over, he sees no reason why it should change the fundamental pillars that drive the business, which is based on providing product that is free of the a1 beta protein present in standard milk.
Hearn said indications of “early green shoots” in the pressured daigou channel had emerged over the past three weeks.
Forsyth Barr analyst Chelsea Leadbetter said a2 Milk’s daigou problems were temporary, and she expects a return to growth from the second half of 2021.
“Current investor focus appears firmly centred on 2021 earnings downgrade risk, which is unlikely to be resolved until the timeline of daigou re-ordering and realignment of channels is clearer,” Leadbetter said in a research note.
Looking through the short-term earnings volatility, a2 Milk’s growth prospects looked attractive, she said.